TVS Motor Company's Q1FY20 results (Underperformer) - Decent quarter;industry outlook weakens

Q1FY20 results

• Operating performance ahead: TVS Motor Q1FY20 PAT at Rs1.42bn (-3% yoy) was ~6% above our estimates. The variance was due to a better than expected operating performance with gross margins improving.
• Margins surprise a bit: Revenues at Rs44.6bn grew +7% yoy despite weak volumes (+2% yoy) as realizations rose ~8% yoy on regulatory cost push (ABS). EBITDA margins at 8% (up 30bps yoy) beat our estimates (est: 7.3%). The EBITDA margins were supported by an improvement in gross margins (up 150bps qoq) which the management attributed to lower commodity costs, better product mix and cost cutting measures. This was partially offset by negative operating leverage (staff costs increased by 93bps qoq). Consequently, absolute EBITDA grew 11% yoy to Rs3.6bn. Depreciation expenses rose 16% qoq – the management indicated that the impact of INDAS 116 was minimal and the increased depreciation could be attributed to higher capex. PAT at Rs1.42 bn declined by 3% yoy (~6% ahead of expectations).
• Concall highlights: (a) The company expects the 2W industry to register volume de-growth even in H2FY20 – we note TVS is the first automobile company to guide towards a weak H2. Previously, the company had hinted at a strong Q2 & Q3 on BSVI linked pre-buying. However, the management expects TVS to grow at a faster rate than the industry (b) Commodity costs are likely to remain stable in FY20. (c) Gross margin improvement is result of cost reduction techniques and could sustain at similar levels for the year (d) Current inventory is at 35 days expected which could be brought down further.

Key positives: Improved gross margins

Key negatives: Higher staff cost; weak industry guidance

Change in estimates: We cut our estimates for FY20/21 by 12%/14% respectively on weak volume growth/margins.

Valuations & view

The two wheeler market will likely continue to be stressed as rising cost pressures (ABS, BSVI) coincide with increasing competitive intensity and a weakness in demand. The management’s guidance of a weak H2 for the industry adds to concerns. While the stock has come off sharply, the valuations at 18XFY21 still remain high in our view. We maintain an Underperformer rating with a target price of Rs340 (16xFY21E EPS + Rs50 TVS Credit).